DEALBOOK; 16 Million Reams of Paper, Please

By KEVIN ROOSE

Published: July 12, 2012

A single company purchased more than 50,000 Hewlett-Packard computers last year, buying in bulk to shave millions of dollars off its costs.

But it was not General Electric, Procter & Gamble or another large, multinational conglomerate with the muscle to dictate prices to suppliers. Rather, the big buyer was the Blackstone Group, a private equity firm.

Private equity firms like Blackstone are emerging as a powerful new force in the marketplace. The big investors, which collectively oversee thousands of companies, are using their size and scope to pressure suppliers, set their own prices and exert their influence in a range of industries, including health care, construction and consumer goods.

Last year, Blackstone was part of a group of companies that collectively bought 16 million reams of copy paper, 35 million FedEx shipments and 900,000 days' worth of rental cars from National and Avis.

''We have incredible leverage,'' said James A. Quella, Blackstone's North American head of portfolio operations. ''The more volume we have, the lower our prices go.''

For years, private equity firms like Blackstone have been viewed as financial alchemists who buy undervalued companies, rejigger their balance sheets and sell them for quick gain. In good times, the strategy worked. Buyout specialists could turn a tidy profit in a matter of months, without getting deeply involved in the businesses they owned.

Hence the ''barbarians at the gate'' stereotype, which has arisen again in recent months as the presidential election has brought the private equity debate into sharp focus. Critics of the industry have faulted Mitt Romney, the presumed Republican candidate, for his years of running Bain Capital, a large buyout firm.

The industry players have been cast as job destroyers more concerned with making money for investors than improving the companies they own. One particularly critical ad for the Obama campaign featured a company, GST Steel, that went out of business years after it was taken over by Bain Capital.

But with the financial crisis, the decline of stocks markets and the sputtering recovery, private equity has been adapting its ways. While profit remains central and layoffs can still be part of the private equity equation, buyout firms are now stuck holding on to companies longer than expected.

As a result, the firms cannot operate at arm's length anymore and instead have had to roll up their sleeves and become full-fledged operators.

The private equity titans have huge economic influence and sway, largely because of the size of their portfolios. Blackstone owns all or part of 74 companies that employ 700,000 people and generate $117 billion in annual revenue.

Taken collectively, Blackstone's businesses would rank as the 13th largest company by revenue, ahead of JPMorgan Chase, I.B.M. and Procter & Gamble.

Kohlberg Kravis Roberts, another megafirm, would be No. 5 on that list with its 74 portfolio companies and $210 billion in aggregate revenue.

The Carlyle Group has investments in 200 portfolio companies, including Dunkin' Brands and Hertz, that collectively employ around 675,000 people - more than General Motors and General Electric combined.

''Historically, private equity firms were about financial engineering,'' said Jason Busch, managing director at Spend Matters, a research firm that focuses on the procurement processes of big corporations. ''That's the fairy tale story from 25 or 30 years ago. Within the last decade, there's been more operational work to do.''

Blackstone and others are taking the cues from the likes of General Electric. Decades ago, G.E. started buying in bulk for its various businesses units, including aerospace, energy, consumer and finance.

Despite the disparate industries spread across dozens of countries, G.E. decided to make buying decisions at the corporate level, as a way to save money and bolster profits. Today, most large multinational companies adhere to a similar strategy for their supply chain, buying computers, office supplies and all types of products at a discount.

Now, private equity firms are too. Both Blackstone and K.K.R. belong to a group purchasing program called CoreTrust, which has roughly 200 member companies including TPG Capital, Bain Capital, and other private equity firms.

The program, which began in 2006, helps companies save 10 to 50 percent on common items, and even lets them stay enrolled after they are sold or taken public by their private equity owners.

''It's just common sense,'' said Todd Cooper, head of procurement for K.K.R., which uses CoreTrust for some bulk purchases. ''Every company, whether I'm a manufacturer or a retailer, uses FedEx. Everybody needs laptops.''

Those savings can add up. Blackstone says it has saved $600 million since 2006 through CoreTrust, direct supplier relationships and an equity health care group, which applies the same group purchasing principles to employee health insurance plans. K.K.R. pegs its total savings at north of $700 million.

''It's a phenomenal benefit,'' said Chris Karkenny, the chief financial officer of Apria, a health care company that was acquired by Blackstone in 2008 and has since used CoreTrust to buy telecommunications equipment, office supplies and other goods. ''We do just over $2 billion in revenue, but we're getting rates that companies with $100 billion in revenue would get.''